The answer is both “yes” and “no.” Given significant transaction costs for getting into and out of a property, owning residential real estate can be an expensive choice, especially if your holding periods between properties are relatively short. Mortgage closing costs up-front and sales commissions on the back end can amount to upwards of 8–10 percent of the total value of the property, which could easily wipe out a large chunk of your equity (your downpayment plus any market-based property price appreciation).

Ownership is usually best if you plan on staying put for a fairly long while, typically five years or more. Over this time, the likelihood that you will lose money from the transaction diminishes, as this can allow for rising property prices to help cover your costs. For example, if you bought a home for $100,000 and made a 10 percent down payment (your own savings) you will probably see perhaps three percent of that amount in mortgage closing costs ($3,000). Your mortgage is $90,000 at 4 percent.

Let’s then speculate that property prices are rising at 2 percent per year.

After 1 year, your mortgage balance has shrunk to $88,415 and your home is now valued at $102,000.

After 2 years, your mortgage balance has shrunk to $86,766 and your home is now valued at $104,040.

After 3 years, your mortgage balance has shrunk to $85,049 and your home is now valued at $106,120.

You decide to sell. The sales commission to the realtor is six percent. This amounts to $6,367. Your net proceeds after paying this would $99,753. Congratulations! You paid $100,000 for something and sold it for less. Of course, there is also the $3,000 in mortgage closing costs to consider, so on a relative basis, this lowers the proceeds to $96,753. Of course, you only have to pay off the mortgage lender the remaining $85,049 — leaving you with $11,704 — not bad. You got your down payment (your own savings) back plus $1,704, so you’re ahead of the game. However, we can’t ignore the other costs of owning a home relative to renting. Homeowner’s and private mortgage insurance costs probably set you back about $125 per month at a minimum, so over 3 years, that totals $4,500. This eats up all of your profit and erodes your original stake, so your actual net is down to $7,204. We’ll not even consider maintenance costs in this tally, but there’s a good bet that you’ll have spent at least some funds over three years to take care of your property (or there may have been common-area charges or HOA fees paid). These further erode your original investment. We’ve also left out the consideration of property taxes, as it’s a fair bet that these would largely be included in the rent if you rented a house. We’ve also discounted any mortgage interest deduction benefit (in our example, the $3,500 per year for interest and approximately $2,500 per year in property taxes — $6,000 — fall short of the standard deductions of $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly. A longer hold period — 4, 5, years or more — improve the numbers for equity to a degree, making it more possible that you can move in and out of a given property without incurring a loss. For all this, though, you do get a place to live and the chance that your choice to buy _may_ also produce a return for you when all things are said and done. Unless you pay cash, financing a home means significant carry costs and only a slow paydown of the outstanding balance to create equity, which some have likened to a “forced savings account.” When you rent, you only get a place to live and have zero chance of accumulating savings.

Renting has its place, especially for younger folks who are not yet settled in a career, or older folks who might have difficulty managing routine maintenance any longer, and for lots of other people in between. Odds are pretty good that you will do both some renting and owning in your life as your choices and lifestyles dictate.


Originally published at www.quora.com.

HSHassociates

Shop mortgage rates from trusted lenders to compare costs. Use our mortgage calculators and find expert mortgage help and money-saving loan tools at HSH.com.

Keith Gumbinger

Written by

25 year expert observer of mortgage & consumer debt. Vice president of HSH.com, the nation’s largest publisher of mortgage and consumer loan information.

HSHassociates

Shop mortgage rates from trusted lenders to compare costs. Use our mortgage calculators and find expert mortgage help and money-saving loan tools at HSH.com.

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